Tuesday, November 16, 2010

Price Regulation in the Buggy Whip Market

By Hank Hultquist, Vice President-Federal Regulatory, AT&T

Throughout the course of this year’s debate over net neutrality and Title II classification, one thing the FCC consistently disavowed was retail price regulation of broadband. Indeed, price regulation should be the last thing a modern regulator would want to be associated with. It is rightly seen in most respectable regulatory establishments as a throwback to monopoly-era bureaucracy.

That is why the FCC’s continued price regulation of the buggy whip, I mean consumer long distance market, is exceedingly…interesting. Remember long distance? Well, to give you an idea of how “yesterday” long distance service has become, here are a few TV spots from the days of yore, when you couldn’t get past an episode of Seinfeld without seeing a few ads for long distance service.

And, despite the fact that the retail consumer long distance market has all but disappeared as a market distinct from the overall voice services market, the FCC still regulates the price structure for “long distance” with a heavy hand.

To further explain, I will take a brief detour into the world of intercarrier compensation….Basically, the FCC’s rules prohibit carriers from charging higher prices to the consumer for “long distance” calls, even though in some areas they incur significantly higher access charges from the local phone companies that “originate” or “terminate” those calls. Under both the FCC’s rules and the telecom act, retail long distance prices must be averaged. Indeed, the purpose of this price regulation is to prevent carriers from pricing their services in order to reflect more precisely the cost of doing business.

Now, one would think it has to be somewhat embarrassing for the FCC to be in the position of regulating pricing in an all-but non-existent market. Rather like having a detailed set of rules for unicorn owners. Nonetheless, the FCC has soldiered on, and even declined in 2007 to forbear from this absurd regulation.

At this point, any rational person has to ask “why?” The answer is that undoing this absurdity would risk unraveling the entire access charge system.

In other words, we have to keep regulating long distance (even though, technically speaking, it doesn’t really exist anymore) in order to preserve the underlying intercarrier compensation regime.

I don’t know if this is the tail wagging the dog, but it sure isn’t the dog wagging its tail. But, fear not, as I have an idea. Since we don’t really have a distinct long distance market any more, why not prepare for the inevitable end of long distance access charges?

Sounds easy, right? In fact, people have been trying to reform this monstrosity for more than a decade. And, this FCC’s National Broadband Plan has committed to begin its effort to reform this irrational system by the end of this year.

Reform has repeatedly foundered because the FCC has been unable to thread a difficult policy/politics needle. Opponents of reform have always been able to block attempts at progress.

My advice to the FCC is simple – stop trying to figure out first exactly what the reform path should look like. Just pick a date, say January 1, 2016. Adopt a rule that prohibits carriers from filing tariffs for switched access services, at both the federal and state levels, as of that date. Wireless carriers have long been subject to such a rule and as a consequence their business model does not depend on access revenues.

Once a date is set for the elimination of access tariffs, the FCC and the industry will be in a much better position to work out the details of how to move from this dilapidated system of implicit subsidies for POTS, to a system that provides only explicit subsidies, and only when needed, for broadband.

Establishment of a date certain for the elimination of access tariffs will give all parties the necessary incentive to finally figure out how to stop regulating prices in the buggy whip market.

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The Wireless Communications Association International (WCAI) exists to advance economic opportunity for the wireless broadband industry worldwide. WCAI is a technology-neutral trade association that seeks to establish a governmental environment favorable to the wireless broadband industry. WCAI also promotes wireless broadband through programs to enhance industry standards, collect and disseminate relevant economic and regulatory information, and increase public awareness of the industry's products and services. Our motto is "Broadband Everywhere, All the Time."